Britain will narrowly avoid a recession this year, but there will be little respite for under-pressure families – with around seven million households expected to struggle to pay energy and food bills, according to an economic think tank.
The National Institute of Economic and Social Research (Niesr) has forecast that the UK will swerve a technical recession – as defined by two or more quarters of falling gross domestic product (GDP) in a row – not just in the final three months of 2022, but also throughout 2023.
It is a more optimistic outlook for the UK economy than that offered by the Bank of England last week, which predicted a shallower but still protracted recession, as well as a recent gloomy prediction from the International Monetary Fund (IMF), which saw Britain being the only major economy to suffer a contraction this year.
It projects that one in four UK households – some seven million families – will be unable to meet in full their planned energy and food bills from their post-tax income in the 2023-24 financial year, up from around one in five in 2022-23.
Middle-income households, will face a hit to their personal disposable income ranging from 7% to 13%, reaching up to £4,000 in the financial year 2022-23, Niesr said.
It is predicting that GDP will be “anaemic” and remain close to zero throughout the year, eking out expansion of just 0.2% in 2023, with the Bank’s slew of interest rate rises adding to cost pressures for consumers and businesses.
The group also predicts that inflation – currently at 10.5% – will only fall to 5.3% by the end of 2023 and stay above 3% throughout 2024.
Inflation will not reach the Bank’s 2% target until the third quarter of 2025.
“So, while the economy seems unlikely to fall into a protracted contraction, the risks are skewed on the downside with higher Bank rate and some withdrawal of fiscal support likely to bear down on activity over the course of 2023 and 2024.”
Niesr also said it believes that interest rates rises “may almost have finished”, with the Bank delivering its 10th hike on Thursday last week, from 3.5% to 4%.
But the report added that: “If core inflation remains high, interest rates may have to remain at their peak for a longer period than we and the markets currently anticipate.”
The Bank is facing a “difficult” path ahead, according to Niesr.
“Given the extent to which the Bank has received criticism for not tightening quickly enough when there were signs of the economy overheating in the post-pandemic recovery, it is possible that monetary policymakers will loosen too quickly to avoid the converse criticism.”
Niesr is calling on Chancellor Jeremy Hunt to loosen his fiscal policy at his upcoming Spring Budget, “rather than allowing himself to be governed by self-set fiscal target”, as well as to ramp up public sector investment and develop a new energy support tariff that discounts bills for the poorest households and raises the price with usage to incentivise efficient energy consumption for the more affluent.